NR m—
1s Refer to Problem 11-9. Assume that the new machinery will cost $750,000 in cash, and that the old machinery cost $600,000 and can be sold now for $120,000 cash.
. Compute the net present value of the proposed investment in new equipment, assuming that the minimum desired rate of return is 10 percent. Compute the solution in the two ways illustrated in the chapter, the “incremental” way and the “total-project” way.
Compute the internal rate of returh and the payback period on the incremental investment.
Comparison of Approaches to Capital Budgeting The Gehrig Company estimates that it can save $2,800 a year in cash operating costs for the next ten years if it buys a special-purpose machine at a cost of $11,000. No residual value is expected. The company’s minimum desired rate of return is 14 percent.
(Round all computations to the nearest dollar. Ignore income taxes.) Compute:
. Payback period . Using discounted cash flow:

a. Internal rate of return

b. Net present value . Payback reciprocal Golf Course (W.Crum) _ Gotrocks offers you a chance to buy a miniature golf course he has built near a resort area. It would cost you $50,000 cash. For this you would get an operating golf course built on leased property at a cost of $30,000, with lease payments of $10,000 per year, payable at end of the year.
Assume a salvage value of $5,000 for the equipment on the course at end of the lease. Operating costs per year for the golf course are $40,000, disregarding depreciation. Income per year, all in cash, is $60,000. You wish to use a 10 percent interest rate in your evaluation. The lease expires in 10 years.
. Does this appear to be a good investment for you? Show all figures.
- Compute the payback period for this investment. L01